Accumulated depreciation has to do with determining the current net worth of a given asset. As part of the process of calculating the accumulated depreciation for an asset or a group of assets, it is necessary to take several factors into consideration, ranging from the original purchase price to the current level of return on the investment.
Because accumulated depreciation involves arriving at an aggregate state of worth of assets at a given point in time, it is necessary to determine the period that is to be reviewed. Generally, the time frame will begin with the date of purchase of the asset, and extend to the end of a current fiscal or calendar period. Setting the time perimeter is important, as calculating depreciation is all about comparing expenses related to the asset that are incurred in a given period of time, versus the worth of the asset during that same period.
Several key elements of data are necessary to calculate the accumulated depreciation. Along with the purchase price, it is important to note the current market value of the asset. Current market value is the amount that the asset could be sold for today. The performance of the asset is also important to arriving at the accumulated depreciation. Specifically, it is important to note any revenue or interest that has been generated by the asset since the acquisition.
Once there is a firm understanding of the costs or expenses associated with the asset, and the revenue gained from ownership of the asset, deduct the cost from the overall worth of the asset, including the purchase price and the revenue. The resulting figure will demonstrate the current level of accumulated depreciation, and helps to establish the book value.
In some cases, calculating the accumulated depreciation may involve allowing for what is known as a write-down. Essentially, the write-down is allowing for a reduction in the carrying amount, due to the fact that the purchase price was more than the current market value.